Income Tax Audit under Section 44AB - Objectives, Applicability & Penalty

Introduction

Growth is the ultimate goal of every business owner. You want more sales, higher turnover, and bigger profits. But as your business scales, so does the level of scrutiny from the Income Tax Department. When your financial numbers cross a certain threshold, the government no longer takes your word for it. They want a third-party expert, a Chartered Accountant, to verify your books of accounts. This process is known as a "Tax Audit" under Section 44AB.

For many entrepreneurs, the term "Audit" sounds intimidating. It implies an investigation. However, a Tax Audit is simply a health check of your financial records to ensure they align with the Income Tax Act. It is not an interrogation but a compliance requirement.

In 2025, the rules have evolved. The government has introduced higher turnover limits for digital businesses to encourage cashless transactions, meaning you might be exempt from audit even with a turnover of ₹9 Crore if you meet certain conditions. In this guide, we will break down the eligibility criteria, the forms involved, and the severe penalties that await if you miss the September 30th deadline.

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Table of Contents

1. What is a Tax Audit under Section 44AB?
2. The Core Objectives of Tax Audit
3. Applicability: Who Needs a Tax Audit in 2025?
4. The ₹10 Crore "Digital" Limit Explained
5. Tax Audit for Professionals (Doctors, Lawyers, etc.)
6. Section 44AD vs. 44AB: The Presumptive Scheme Conflict
7. Forms to File: 3CA-3CD vs. 3CB-3CD
8. Due Dates for Filing Tax Audit Report
9. Penalty for Non-Compliance
10. FAQs

What is a Tax Audit under Section 44AB?

A Tax Audit is an examination of a taxpayer's books of accounts by a practicing Chartered Accountant (CA).

While a statutory audit (under Company Law) focuses on whether the financial statements give a "true and fair view," a Tax Audit focuses strictly on tax compliance. The CA checks if you have calculated your taxable income correctly, if you have deducted TDS on time, and if you have claimed deductions that are legally allowed.

The CA then issues a report (Audit Report) confirming that your returns are in sync with your books or highlighting any discrepancies.

The Core Objectives of Tax Audit

The government introduced Section 44AB with specific goals:

1. Correctness of Income: To ensure the income declared in the ITR matches the books of accounts.
2. Reporting Disallowances: To identify expenses that are disallowed under the Income Tax Act (e.g., personal expenses, cash payments over ₹10,000).
3. Ease of Assessment: To save the Assessing Officer's time. Instead of verifying every bill, the officer relies on the CA's report.
4. Checking Compliance: To verify other compliances like TDS deduction, TCS collection, and loan acceptances/repayments in cash.

Applicability: Who Needs a Tax Audit in 2025?

The requirement for audit depends on the "Turnover" or "Gross Receipts" of the business or profession.

For Business Owners:

• General Rule: If total sales, turnover, or gross receipts exceed ₹1 Crore in the financial year.
• Digital Exception: If cash receipts and payments are less than 5%, the limit increases to ₹10 Crore.

For Professionals:

• If gross receipts from the profession exceed ₹50 Lakhs in the financial year.

The ₹10 Crore "Digital" Limit Explained

This is the most critical update for modern businesses. To promote a less-cash economy, the government raised the audit threshold significantly.

You are exempt from tax audit even if your turnover is up to ₹10 Crore, provided you meet two conditions:

1. Receipts: Aggregate of all amounts received in cash (sales, loans, etc.) does not exceed 5% of the total amount.
2. Payments: Aggregate of all payments made in cash (expenses, asset purchases, etc.) does not exceed 5% of the total payments.

Scenario: A trader has a turnover of ₹8 Crore. He receives all payments via NEFT/UPI and pays all vendors via cheque. Since his cash usage is 0%, he is not required to get a tax audit done, even though he crossed the general ₹1 Crore limit.

Tax Audit for Professionals (Doctors, Lawyers, etc.)

For professionals like doctors, architects, engineers, and CAs, the rules are slightly different.

• Normal Limit: Audit is mandatory if gross receipts > ₹50 Lakhs.
• New Tax Regime (44ADA): If a professional opts for the Presumptive Taxation Scheme under Section 44ADA and declares 50% of receipts as profit, the audit limit is enhanced to ₹75 Lakhs (provided cash receipts are < 5%).

Section 44AD vs. 44AB: The Presumptive Scheme Conflict

Small business owners often get confused here.

If your turnover is below ₹2 Crore (or ₹3 Crore for digital businesses), you can opt for Section 44AD. Under this scheme, you just declare 8% (or 6% for digital) of your turnover as profit and pay tax on it. You do not need to maintain detailed books or get an audit.

However, Audit becomes mandatory if:

1. You declare a profit lower than the deemed rate (e.g., you claim your profit is only 4%).
2. AND your total income exceeds the basic exemption limit (₹2.5L / ₹3L).

In this case, Section 44AB overrides 44AD, and you must get audited regardless of the turnover being low.

Forms to File: 3CA-3CD vs. 3CB-3CD

The Tax Audit Report is not a single document. It consists of a "Form" and an "Annexure."

1. Form 3CA + Form 3CD

• Applicable to: Businesses that are already mandated to get their accounts audited under any other law.
• Example: A Private Limited Company. They already undergo a Statutory Audit under the Companies Act. So, for Tax Audit, they use Form 3CA.

2. Form 3CB + Form 3CD

• Applicable to: Businesses that are not required to get audited under any other law.
• Example: A Proprietorship firm or a Partnership firm. Their only audit requirement is the Income Tax Act. So, they use Form 3CB.

Note: Form 3CD is the detailed questionnaire (44 clauses) containing financial data, which is common to both.

Due Dates for Filing Tax Audit Report

Deadlines are strict.

• Filing Audit Report: 30th September of the Assessment Year. (e.g., for FY 2024-25, the deadline is Sept 30, 2025).
• Filing Income Tax Return (ITR): Tax audit cases get an extended deadline for ITR filing, usually 31st October.

Warning: You must file the Audit Report before filing the ITR.

Penalty for Non-Compliance

If you are liable for a tax audit but fail to get your accounts audited or fail to furnish the report by September 30th, the Assessing Officer can levy a penalty under Section 271B.

The penalty is the lower of the following two amounts:

1. 0.5% of the Total Sales/Turnover or Gross Receipts.
2. ₹1,50,000.

Example: If your turnover is ₹2 Crore and you miss the audit:

• 0.5% of ₹2 Cr = ₹1,00,000.
• Max Limit = ₹1,50,000.
• Penalty = ₹1,00,000.